5. [Weighted Average Cost of Capital] Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital: Financing Source Cost of Capital Interest Dollar Amount Rate Short-Term Loan $200,000 11% Long-Term Loan $200,000 13% Equity Capital $600,000 Kareem Construction is in the 30 percent average tax bracket. A. Calculate the after-tax (WACC) for Kareem. The WACC equation is provided below: WACC = (short-term debt rate) x (1-tax rate) x (short-term debt-to-value) + (long-term debt rate) x ( tax rate) x (long-term debt-to-value) + (equity rate) x (1-debt-to-value) 24% B. Show how Kareem's WACC would change if the tax rate drops to 25 percent and the estimated cost of equity capital is based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.
5. [Weighted Average Cost of Capital] Kareem Construction Company has the following amounts of interest-bearing debt and common equity capital: Financing Source Cost of Capital Interest Dollar Amount Rate Short-Term Loan $200,000 11% Long-Term Loan $200,000 13% Equity Capital $600,000 Kareem Construction is in the 30 percent average tax bracket. A. Calculate the after-tax (WACC) for Kareem. The WACC equation is provided below: WACC = (short-term debt rate) x (1-tax rate) x (short-term debt-to-value) + (long-term debt rate) x ( tax rate) x (long-term debt-to-value) + (equity rate) x (1-debt-to-value) 24% B. Show how Kareem's WACC would change if the tax rate drops to 25 percent and the estimated cost of equity capital is based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a systematic risk measure or beta of 2.0.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![6. [Weighted Average Cost of Capital]
Kareem Construction Company has the following amounts of interest-bearing debt and common equity
capital:
Cost of
Capital
Interest
Financing
Source
Dollar
Amount
Rate
Short-Term Loan
$200,000
11%
Long-Term Loan
$200,000 13%
$600,000
Equity Capital
Kareem Construction is in the 30 percent average tax bracket.
A. Calculate the after-tax (WACC) for Kareem. The WACC equation is provided below:
WACC = (short-term debt rate) x (1-tax rate) x (short-term debt-to-value) + (long-term debt rate) x (
tax rate) x (long-term debt-to-value) + (equity rate) x (1-debt-to-value)
24%
B. Show how Kareem's WACC would change if the tax rate drops to 25 percent and the estimated cost of
equity capital is based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a
systematic risk measure or beta of 2.0.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F89c12fcd-0664-48f7-973c-467386cb4c24%2F19c02f31-70d4-485a-8918-5f6a24df7076%2F6qrm399_processed.jpeg&w=3840&q=75)
Transcribed Image Text:6. [Weighted Average Cost of Capital]
Kareem Construction Company has the following amounts of interest-bearing debt and common equity
capital:
Cost of
Capital
Interest
Financing
Source
Dollar
Amount
Rate
Short-Term Loan
$200,000
11%
Long-Term Loan
$200,000 13%
$600,000
Equity Capital
Kareem Construction is in the 30 percent average tax bracket.
A. Calculate the after-tax (WACC) for Kareem. The WACC equation is provided below:
WACC = (short-term debt rate) x (1-tax rate) x (short-term debt-to-value) + (long-term debt rate) x (
tax rate) x (long-term debt-to-value) + (equity rate) x (1-debt-to-value)
24%
B. Show how Kareem's WACC would change if the tax rate drops to 25 percent and the estimated cost of
equity capital is based on a risk-free rate of 7 percent, a market risk premium of 8 percent, and a
systematic risk measure or beta of 2.0.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 4 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education